Category Archives: Investing Money

When Will the Bull Market End?

My Comments: Be assured, I have no idea. But then, I don’t know what I’m going to have for lunch either. All I know is that I will have lunch and one of these days, this bull market will end.

The trick is to understand that it will end, and if you’re not ready to watch a ton of your money disappear, then you have to be ready. Some of you may have enough money that you really don’t give a damn. Good for you.

But if you worry about this, even a little bit, then you should talk with someone who has some answers. Someone you can relate to. I promise it won’t hurt much.

By Anne Kates Smith, Senior Editor @ Kiplinger, June 26, 2017

As the second-longest bull market in history makes its way into its ninth year, many investors are understandably asking: When will it end? We’d all be rich if there was a foolproof way to figure that out. But we can make some educated guesses.

One thing to remember is that bull markets don’t die of old age alone. Something’s got to kill them. And the surest weapon is a recession. That’s not always the case. There have been bear markets without a recession, as the crash of 1987 shows. But many of the worst downturns have been accompanied by a recession – or, more accurately, followed by one. The Great Recession that began in December 2007 was preceded by the start of a bear market in October of that year that went on to lop 57% off stock prices. The recession that began in March 2001 followed a March 2000 market peak that initiated a 49% stock decline.

False alarms are frequent, says economist and market strategist Ed Yardeni, of Yardeni Research. “The next bear market will start when the market anticipates the next recession – and turns out to be correct. The market has anticipated lots of recessions since 2008 that have turned out to be buying opportunities,” says Yardeni.

When recessions do pair with stock market peaks, they can do so immediately, as with the concurrent start of the recession and bear market of July 1990, or they can lollygag more than a year behind. On average, recessions begin 7.7 months following a stock market peak, according to market research firm InvesTech Research.

If we only knew when the next recession would begin. Well, Yardeni has a date in mind: March 2019. He bases his determination on the average number of months the economy has continued to expand after it has reached its previous peak, going back to the early 1970s. Counting from November 2013, which is when the economy finally surpassed its 2007, prerecession peak, Yardeni arrives at March 2019.

The date is not an official forecast, says Yardeni, who adds that it comes with no guarantees and plenty of questions. “What do we know today that suggests that March 2019 is a realistic date, or that a recession will come sooner or later? Right now, March ’19 looks realistic,” says Yardeni. “But if pressed,” he adds, “I’d say it might be later.” If the economic cycle sticks to the averages and if the stock market does, too – both big “ifs” – then investors should look for a market top around August of next year.

4 signs of recession

Sam Stovall, chief investment strategist at investment research firm CFRA, looks at four indicators when he’s searching for a recession on the horizon. Every recession since 1960 has been preceded by a year-over-year decline in housing starts, says Stovall. The dips have ranged from a 10% decline to a drop of 37%, and they have averaged 25%. The most recent report on housing starts showed a decline of less than 3%. “So we’re on yellow alert, not red,” says Stovall.

Consumer sentiment is another signpost. Before a recession kicks in, you’ll typically see an average decline of 9% in the University of Michigan’s monthly sentiment index compared with the previous year, says Stovall. Current reading: up 2.4%.

A drop over a six-month period in the Conference Board’s Index of Leading Economic Indicators means trouble, too, with declines of 3%, on average, registering ahead of an economic downturn. Latest six-month change: up 3%.

Finally, when yields on 10-year bonds dip below the yields on one-year notes – known as an inverted yield curve – look out, says Stovall. Ominously, long-term rates recently have been under pressure while the Federal Reserve pushes short-term rates higher. “We’re getting a flatter yield curve, but nowhere near an inversion,” says Stovall. His conclusion: No recession is in sight.

Before you fixate on the twin risks of recession and a bear market, ponder a third risk – exiting a bull market too early. The payoff in the final year of a bull market is historically generous, with returns, including dividends, averaging 25% in the final 12 months and 16% in the final six months.

Nonetheless, investors have every right to ratchet up the caution level at this stage of the game. Now is a good time to make sure your portfolio reflects your stage in life and your risk tolerance. Stick to a regular rebalancing schedule to lock in gains and maintain the appropriate balance between stocks, bonds and other assets, domestic and foreign. And whatever you do, make sure your portfolio is where you want it to be before you go on summer vacation next year.

Investing Defensively

My Comments: I posted recently that we had better revise our investment expectations downward if we are planning to use our retirement savings to sustain our standard of living for the next twenty years or so.

I attributed the likelihood of lower growth and investment return numbers on demographics and a rising interest rate environment.

The article below by James Hickman is long, full of charts, and technically ripe. You may easily get lost. But he echoes the same message as mine but mostly for those of you who are OK with playing the markets by yourself. If that’s not you, there are other ways to be defensive.

Below is his introduction to Part I of II. If you click on his name, you’ll also find Part II.

May 31, 2017 \ James Hickman

Retired Or Retiring In Next 15 Years? Better Get Defensive (Part I Of II)


  • Market timing is sensible in certain circumstances – like reducing US equities exposure now.
  • Always passively invest in public equities and fixed income – not alternatives – but asset allocation still requires active approach.
  • Financial healing power of “the long-term” is no remedy for max drawdowns in the retirement plan homestretch.
  • Portfolio implications of 3% ROI for another decade, 2% US GDP forever.

“Market timing is a loser’s game” is a misleading marketing slogan peddled by the long-only mutual fund machine. The mass cash movements in and out of public equity markets that cause market timing failure are rarely driven by disciplined, value-based decisions about asset allocation but rather by emotional investor capitulation to protracted trends at precisely the wrong times. The trite phrase is invariably trotted out when markets are most over-valued and risky – when investors should be selling but rarely are. Now is one of those times.

Recognizing that you should always use low-cost, passive vehicles in certain asset classes and pay for skill in others is not news. But the more important question is: How much should be allocated to each asset class? Asset class and investment strategy exposures, beyond just equities and fixed income, is critical to portfolio diversification and return variation (Brinson, Hood and Beebower – 1986; and Xiong, Ibbotson, Idzorek and Chen – 2010). But can asset classes be timed? The answer is yes.

The professional investment industry has always been animated by failed attempts to systematize alpha generation – to create a better mousetrap for delivering repeatable outperformance of the market and justify higher active management fees. Active managers continued their interminable streak of underperforming the broader markets in 2016. According to S&P Dow Jones Indices’ SPIVA US Scorecard for 2016, “Over the 15-year period ending Dec. 2016, 92.15% of large-cap, 95.4% of mid-cap, and 93.21% of small-cap managers trailed their respective benchmarks.”

Demographics and Money

My Comments: If you are in pretty good health today, chances are you’re going to live into your 90’s. Which begs the next question: “How are you going to pay for food, shelter, medical care, etc.”?

This is a global conundrum, brought about by medical advances and a reluctance on the part of people like me to simply roll over and die.

If you are starting the transition to what we euphemistically call ‘retirement’, you had better pay attention. There are existential risks out there which will determine if the last ten years of our lives will be ‘good’ years or ‘not so good.

My message here is for you to ignore those risks over which we have no control and spend your time and effort on mitigating the risks over which you do have some control.

Demographics Will Be The Biggest Driver Of Financial Markets Going Forward By Stephen McBride, May 25, 2017

Demographics are destiny, and unfortunately for Western economics, destiny isn’t on their side.

Speaking at the Mauldin Economics’ Strategic Investment Conference in Orlando, founders of Real Vision TV Raoul Pal and Grant Williams dissected the profound demographic changes now taking place and how investors should position their portfolios for those changes.

Most of the population growth in the past half-century has come from Middle-Eastern and Asian regions. In contrast, population growth in Western democracies has been in sharp decline.

What Are the Implications of Aging Populations for the West?

As people near retirement, they become more conservative in their spending. With consumption accounting for 70% of the US economy, this acts as a huge headwind to economic growth.

In fact, adverse demographics are a key reason why this recovery has been the slowest one on record in the post-war period.

Unfortunately, it’s going to get worse…

This year, the first Baby Boomers turn 70, and that’s significant for financial markets.

Due to the mandatory minimum drawdown laws for retirement plans like IRAs and 401(k)s, when you turn 70 ½, you are forced to withdraw at least 5% of the value of the plan each year.

This forced selling will flood the market with billions worth of equities and bonds, which will push down prices.

Another reason Raoul and Grant believe adverse demographics spell trouble for the West is that historically, debt levels have tracked median age.

In fact, for over four decades, the labor force participation rate has been highly correlated to the Federal Reserve’s balance sheet.

With over 3.5 million Baby Boomers turning 65 each year for a dozen years, Raoul and Grant believe economic growth will continue to be sluggish and debt levels will rise.

So, with demographics weighing down on the US, where should investors deploy capital based on these powerful trends?

India’s Potential

With an exploding population now accounting for over 17% of the global total, both Raoul and Grant are bullish on India.

To conclude, Raoul named his three top trades going forward: “Longer term, I think US Treasuries and Iran are a great play. Shorter term, I think being short oil could prove profitable.”

Asset Allocation Strategies That Work

My Comments: It’s not easy to make your money grow. And to make sure once it’s grown, it doesn’t disappear.

A long time truth involves a principal called asset allocation. It means spreading your money across different styles and kinds of assets. Some will always work better than others, not just when going up, but when going down also.

A good asset allocation mix perhaps means not hitting a home run, but also not striking out.

By Jason Van Bergen / January 2017

Establishing an appropriate asset mix is a dynamic process, and it plays a key role in determining your portfolio’s overall risk and return. As such, your portfolio’s asset mix should reflect your goals at any point in time. Here we outline some different strategies of establishing asset allocations and examine their basic management approaches.

Strategic Asset Allocation
This method establishes and adheres to a “base policy mix” – a proportional combination of assets based on expected rates of return for each asset class. For example, if stocks have historically returned 10% per year and bonds have returned 5% per year, a mix of 50% stocks and 50% bonds would be expected to return 7.5% per year.

Constant-Weighting Asset Allocation
Strategic asset allocation generally implies a buy-and-hold strategy, even as the shift in values of assets causes a drift from the initially established policy mix. For this reason, you may choose to adopt a constant-weighting approach to asset allocation. With this approach, you continually rebalance your portfolio. For example, if one asset is declining in value, you would purchase more of that asset; and if that asset value is increasing, you would sell it.

There are no hard-and-fast rules for timing portfolio rebalancing under strategic or constant-weighting asset allocation. However, a common rule of thumb is that the portfolio should be rebalanced to its original mix when any given asset class moves more than 5% from its original value.

Tactical Asset Allocation
Over the long run, a strategic asset allocation strategy may seem relatively rigid. Therefore, you may find it necessary to occasionally engage in short-term, tactical deviations from the mix to capitalize on unusual or exceptional investment opportunities. This flexibility adds a market timing component to the portfolio, allowing you to participate in economic conditions more favorable for one asset class than for others.

Tactical asset allocation can be described as a moderately active strategy, since the overall strategic asset mix is returned to when desired short-term profits are achieved. This strategy demands some discipline, as you must first be able to recognize when short-term opportunities have run their course, and then rebalance the portfolio to the long-term asset position.

Dynamic Asset Allocation
Another active asset allocation strategy is dynamic asset allocation, with which you constantly adjust the mix of assets as markets rise and fall, and as the economy strengthens and weakens. With this strategy you sell assets that are declining and purchase assets that are increasing, making dynamic asset allocation the polar opposite of a constant-weighting strategy. For example, if the stock market is showing weakness, you sell stocks in anticipation of further decreases; and if the market is strong, you purchase stocks in anticipation of continued market gains.

Insured Asset Allocation
With an insured asset allocation strategy, you establish a base portfolio value under which the portfolio should not be allowed to drop. As long as the portfolio achieves a return above its base, you exercise active management to try to increase the portfolio value as much as possible. If, however, the portfolio should ever drop to the base value, you invest in risk-free assets so that the base value becomes fixed. At such time, you would consult with your advisor on re-allocating assets, perhaps even changing your investment strategy entirely.

Insured asset allocation may be suitable for risk-averse investors who desire a certain level of active portfolio management but appreciate the security of establishing a guaranteed floor below which the portfolio is not allowed to decline. For example, an investor who wishes to establish a minimum standard of living during retirement might find an insured asset allocation strategy ideally suited to his or her management goals.

Integrated Asset Allocation

With integrated asset allocation, you consider both your economic expectations and your risk in establishing an asset mix. While all of the above-mentioned strategies take into account expectations for future market returns, not all of the strategies account for investment risk tolerance. Integrated asset allocation, on the other hand, includes aspects of all strategies, accounting not only for expectations but also actual changes in capital markets and your risk tolerance. Integrated asset allocation is a broader asset allocation strategy, albeit allowing only either dynamic or constant-weighting allocation. Obviously, an investor would not wish to implement two strategies that compete with one another.

Asset allocation can be an active process to varying degrees or strictly passive in nature. Whether an investor chooses a precise asset allocation strategy or a combination of different strategies depends on that investor’s goals, age, market expectations and risk tolerance.

Keep in mind, however, that this article gives only general guidelines on how investors may use asset allocation as a part of their core strategies. Be aware that allocation approaches that involve anticipating and reacting to market movements require a great deal of expertise and talent in using particular tools for timing these movements. Some would say that accurately timing the market is next to impossible, so make sure your strategy isn’t too vulnerable to unforeseeable errors.

Source article —

What Is The World Coming To?

My Comments: What’s your poison? Politics? Money? Entertainment? Sports? Religion?

Well, this post is about economics and finance. Some of you will run and hide. That’s OK. It comes from Guggenheim Investments and is a quick and dirty look at the next few months…

With spreads tight in high-yield corporate bonds, loans, structured credit, and Agency mortgage-backed securities, we expect an uptick in volatility this summer. While we see some near-term weakness ahead, our positioning, informed by the long-term themes identified in the highlights below, should provide a sound footing for our portfolios. Our Sector teams, Portfolio Managers, and Macroeconomic and Investment Research Group discuss shorter-term, sector-specific tactics for managing through current market conditions in the pages of this edition of the Fixed-Income Outlook.

Report Highlights

▪ With the Federal Reserve (Fed) set to continue to raise interest rates—and at a faster pace than that which is priced in the market—positioning for a flattening yield curve will remain a major theme in our portfolios.

▪ In addition to two more hikes this year, we expect the Fed will raise rates four more times in 2018. The Fed is also plotting a strategy to reduce its balance sheet; this should pressure yields higher in the short end and belly of the curve, which is where most of the new Treasury issuance is likely to come.

▪ Our view on the global macroeconomic environment is positive, which should support strong credit fundamentals for several years. China has stabilized, Europe is recovering, and corporate earnings in the U.S. are rising.

▪ We are focused on the legislative complexities of passing President Trump’s pro-growth agenda. Failure to put his plans into effect in a timely manner may cause markets to realize that the Trump rally is long on promise and short on delivery.

Is The S&P 500 Overvalued?

My Comments: Are you willing to bet your financial future that this time it’s different? 27 days after this was written and it’s only gotten worse.

By Aaron Hankin | April 18, 2017

Given rising geopolitical tension in the Middle East and North Korea, and rising skepticism about Trump administration policy, you could be excused for wondering just why equity markets are so resilient. In fact, so resilient that the S&P 500 is a mere 2.2 percent shy of its all-time high. The number of stock market bears grows and grows even as equities continue to climb, and some metrics back up the bears.

In a recent note entitled “S&P 500 Relative Value Cheat Sheet,” Bank of America/Merrill Lynch noted that 18 of 20 popular valuations of the stock market rate the S&P 500 as overvalued, one as high as by 105 percent.

Popular measures of equity market valuations, P/E ratios, remain at lofty levels. Ever since the Federal Reserve began its quantitative easing (QE) program, P/E ratios have climbed as equities offered more value than bond yields, but at 17.5, the forward P/E ratio of the S&P 500 remains at its highest level since 2002. According to Bank of America/Merrill Lynch, the forward P/E ratio is 15 percent overvalued compared to its historical average, the trailing P/E ratio 25 percent overvalued and the Shiller P/E ratio, which adjusts for inflation, is 73 percent overvalued compared to its historical average.

As with standard valuation methods, the S&P 500 looks overvalued against commodities. In gold terms, the S&P 500 is 20 percent above its historical average, and in WTI crude oil terms it is a staggering 105 percent above its historical average. In S&P 500 market cap/GDP terms, the S&P 500 is 85 percent above its historical average.

According to these 20 metrics, the S&P 500 is cheap compared to only Price to Free Cash Flow and S&P to Russell 2000 terms.

Metrics Suggest Bargains Can Be Found

Despite all the overvaluation rhetoric and metrics, there are some bargains out there. Bank of America/Merrill Lynch notes that even if you strip out the tech bubble, the tech sector trades at a discount with a forward P/E of 1.03 compared to its long-term average of 1.16, and if the market sees a shift back to the mean in pricing metrics there will be some tasty bargains.

“There are even greater mean-reversion opportunities at the industry level, with valuations for autos, media, airlines, biotech, and communications equipment suggesting 40 percent to 90 percent of upside if they were to snap back to long-term averages,” Bank of America/Merrill Lynch said.

The Bottom Line

With equity markets marching back towards all-time highs, a growing number of people are calling for a correction, and maybe there is some merit to the argument that the stellar run of U.S. equities is nearing an end. “Valuations typically matter little in the final stage of a bull market during which sentiment and positioning are the key drivers of returns,” Bank of America/Merrill Lynch said.

Flashing Red Ratio

My Comments: Will stock prices plummet? Maybe…

The Ratio That Predicted The 2001 And 2008 Stock Market Crashes Is Again Flashing Red

by Atle Willems, May 4, 2017

The co-movement of the stock market and the money supply to saving ratio has been obvious especially in recent decades.

But the two have now dislocated with stocks still climbing though the ratio has plummeted.

This should be worrying for stock market investors since stocks crashed following the peaks in the money supply to saving ratio in ’01 and ’08.

Savings are paramount for economic growth. Frequently ignored these days is the principle that an adequate amount of savings also helps promote economic stability. Since money is created as debt under the current monetary system, changes in the money supply relative to saving can therefore serve as an indicator of the degree of economic risk present in an economy.

As is well-known among economists, the economic costs of monetary inflation are wide-ranging and include price inflation and distortions, over-consumption and mal-investments. Combined, these costs lead to lower economic growth and, in some cases, poverty. They also contribute to economic instability.

Enter the money supply to saving ratio (MS/S), a ratio based on an insight F.A. Hayek first offered generations ago and which I outlined some weeks back. In short, the higher the MS/S ratio the potentially greater the economic distortions and the higher the risk of boom and bust cycles. The ratio is therefore closely related to The Austrian Theory of The Business Cycle.

Following a period of expansion, the MS/S ratio must at some stage eventually drop. An inflating money supply will ultimately produce intolerable levels of price inflation. Alternatively, banks will eventually cut back lending as delinquency and default rates increase (which may trigger a banking crisis). The latter has been the biggest problem during the last couple of decades.

As for the denominator in the ratio (saving), people will increase the proportion of income saved when uncertainty increases. This may take place in tandem with, or even be induced by, a declining money supply growth rate. Saving preferences, especially increases, can change substantially quicker and more violently than the money supply.

As economic and stock market corrections are closely related (as both react to changes in the elastic money issued by banks), the chart below reveals how peaks in the MS/S ratio for the U.S. economy were associated with the onsets of the 2000/1 and 2007/8 stock market corrections.

The chart also reveals how stocks turned slightly ahead of the MS/S ratio before the prior two downturns and that peaks in the ratio were associated with stock market losses. The table below depicts the annualized price changes in the Russell 3000 stock market index for four different time periods following the 2001 and 2008 peaks in the MS/S ratio.

For example, the table shows that stocks depreciated 10.9% on an annualized basis over the 6 month period following the Q1 2008 peak in the MS/S ratio and 41.2% during the first 12 months.

But the chart also shows this: stocks and the ratio departed in the second quarter last year with the two heading in opposite directions. Based on the 2001 and 2008 outcomes and the fact that stocks have again appreciated in recent months, these developments could be troubling for stock market long positions going forward.

Though the chart shows an initial decline from peaks actually did mark the end of the 2001 and 2008 upward swings, successfully timing peaks in the ratio must be assumed to be more luck than science.

In general however, the higher the MS/S ratio and the longer it remains elevated, the greater the probability of an economic reaction and hence the greater the chances stocks will perform badly. It could therefore prove to be a wise move to gradually decrease the allocation to stocks proportionally with increases in the ratio. For those more concerned with capital preservation than squeezing out a few more percentage points returns from a fading bull market, it could prove wise to dispose of all stocks once the MS/S ratio has turned downward. For aggressive speculators, this might even prove an opportune time to go short.

Based on the above observations and the theory underpinning the MS/S ratio, it would not be unreasonable to be prepared for further declines in the ratio from the 2016 peak and another financial crisis. As the ratio has already contracted for two consecutive quarters since the record peak in Q2 last year, it also would not be unreasonable to expect stocks to soon plummet once again.